Why are global markets so complacent?

The world is beset with risks - political, geo-political, fiscal and monetary. But markets choose to look the other way, either being blissfully oblivious or wantonly negligent

- SAJJID Z CHINOY

Equity markets around the world continue to be on a tear. The MSCI Global Equity Index is close to its lifetime highs, up a staggering 30 per cent over the last year. But it is not just equities; all asset classes have thrived in recent months.

Yields may have backed up in recent weeks but United States rates are still pricing in lots of Federal Reserve cuts over the next year. And credit spreads remain very modest. So financial conditions in the US are very benign and have gotten progressively easier as reflected, for example, in the Chicago Fed's Financial Conditions Index.

This buoyancy is not limited to advanced economies. Emerging Market (EM) equities are also up almost 25 per cent over the last year and many EM currencies have rallied against the dollar over the last three months.

But why should we be surprised? Isn't the US firmly on its way to a soft landing? Or perhaps, no landing at all, given the sheer resilience of US growth? Hasn't China finally pulled out all the stops to jumpstart growth? Isn't the Fed in the midst of a large cutting cycle that will induce EM central banks to cut in tandem? In short, aren't we in macroeconomic "Goldilocks" land?

Or, are we? A more sober assessment of the data suggests the enthusiasm of global markets sits uneasily with a more uncomfortable economic reality that is peppered with a litany of political, geopolitical, fiscal and monetary risks.

To be clear, US growth has been resilient beyond expectation. Defying all forecasts, gross domestic product (GDP) growth is remarkably on track to print close to 3 per cent again this year. Prima facie, this is good news for the economy and equity markets, but it risks making the last mile of disinflation harder.